The Collected Works of Author and Blogger Larry Roberts

Archive for April, 2016

FHA insured mortgages are assumable, meaning a borrower can transfer the debt to a different borrower rather than paying off the old debt, a useful feature in a rising mortgage rate environment. Over the last 35 years, mortgage interest rates have fallen steadily, so very few buyers active in the housing market today have ever experienced a rising mortgage interest-rate environment. When rates steadily fall, people typically refinance and terminate their old mortgage in favor of a new one with better terms. Most people expect rates to rise from our record lows, and when rates rise, people typically don't refinance because they want to keep their low mortgage interest-rate mortgage. In a rising mortgage rate environment, people need to use…[READ MORE]

Principal reduction rewards those who deserve help the least at a very high cost paid by those who obtain no benefit at all. Principal reduction transfers wealth from one party to another. For every underwater borrower who ostensibly needs principal reduction, there's an investor who holds that loan as an asset; for the borrower to gain, the investor must lose. While few may decry the confiscation of wealth from the one-percenters, most of these loans are held by pension funds for ordinary Americans, and most of those are backed by government loan guarantees, so any widespread principal reduction program would be paid for by everyone, not merely a demonized select few. Further, costly principal reductions fail to benefit many people…[READ MORE]

Everyone who buys a new home believes the neighborhood is perfect, and after they move in, any additional residents ruin the neighborhood with more traffic congestion. None of the new residents notice the glaring hypocrisy. Whenever a family buys a new house, the builder constructed that house only because no local opposition group was strong enough to prevent its construction; however, once new homeowners move in, many of them immediately adopt the belief that traffic congestion is out of control and any new development will ruin the character of their neighborhood, so these nimbys band together to prevent others from obtaining the same benefit they enjoy. Through willful ignorance, these new homeowners fail to comprehend the hypocrisy of this attitude…[READ MORE]

Lenders utilize FICO scores to evaluate the risk that a borrower will repay the debt as agreed. The lower the score, the higher the risk, so lenders charge higher rates for lower FICO score borrowers. The availability of credit cycles from periods of tight underwriting standards to periods of lax standards. Credit-fueled markets like real estate are most stable when credit is tight because very few borrowers default. In a tight credit environment, lenders are very focused on ensuring the borrower can repay the loan and the lender can recover their capital if the borrower fails to pay. It would seem obvious and intuitive that lenders would always be focused on those things, but history shows that when times are…[READ MORE]

Homebuilders won't build what they can't sell, and household formation isn't so robust that builders must provide more to keep pace with demand. Since 2012 the financial media chronicled the reflation of the old housing bubble but portrayed it falsely as a robust recovery based on strong fundamentals. Ordinarily, when prices rally in the market for any commodity, good, or service, the rally originates from resurgent demand that outstrips the available supply, and as a result, sellers and suppliers produce more to meet demand. Since 2012 when house prices bottomed, none of the usual signs of strong demand were present. For example, consider that since the rally began, the housing market witnessed the following: 20-year lows in home ownership 6-year…[READ MORE]

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